U.S. stocks rallied on Friday and major indexes snapped a three-week losing streak as investors continue to factor in the expectation for higher interest rates just around the corner. All 11 sectors in the S&P 500 closed in the green for the week, with the consumer discretionary sector standing out as the top gainer. The Dow finished the holiday-shortened week up 2.8%, while the S&P 500 Index rose 3.6% and the Nasdaq shot up 4.2%.
But, the economy is slowing down even as inflation continues to drop. There are a group of folks at the Fed who think that inflation will stick around for a lot longer that could result in weaker economic growth, higher unemployment and more pronounced recession. And the markets are following their comments by selling when they get hawkish and rallying when the hawkishness is priced into the market.
The big question is why were markets getting it wrong about a possible Fed pivot from its hawkish position?
Future Wealth’s View
Pavlov showed that dogs could be conditioned to salivate at the sound of a bell if that sound was repeatedly presented at the same time that they were given food. Over the past year, the markets have behaved like the proverbial dog to each and every comment by the Fed Chair and its members. While we, at Future Wealth LLC, hate to spoil their party, we would remind those who are adjusting their portfolios to keep up with market’s whims, that the Fed has not even been close to accurate with its predictions or its judgment of the economic signals over the past year to warrant any major reshuffling in investor portfolios. To quote an old joke – “Fool me once, shame on you. Fool me twice, shame on me. Fool me everyday, shame on the weatherman”.
The bottom line is that we are still in a bear market but the root cause of the bear market – inflation, appears to be on its way down. The big day for the market and for all our portfolios is Sep 13 when CPI for August is released. But, while you wait for Wednesday Sep 13, we would recommend staying away from looking at your portfolio values everyday and instead invest the time to read a masterful book, just released, by David Rubenstein, titled “How to Invest: Masters of the Craft” that features interviews from leaders in venture capital, real estate, private equity, hedge funds, crypto and endowments. You will not regret reading it.